Thursday, May 09, 2013

Prices for corn and soybeans, five years from now.

Although challenges to planting the 2013 crop may provide some degree of support to corn and soybean prices, they have quickly faded from the 2012 highs and are threatening to diminish further from the highs that began in 2007. When corn prices were pumped up from ethanol demand and soybean prices had to bid for acres, a new era of commodity prices was declared by economists. Since we are six years into that era and prices are settling down as predicted, how far down will they settle, anyway?

Iowa State University economists Dermot Hayes and Lisha Li leave little doubt they believe commodity prices are high now, but offer some long term projections which may be valuable for farmers to engage in some long term financial planning. After all, if commodity prices fade further, it may be hard to make the cash rent payment. The economists offer a formula for projecting corn and soybean prices out for five years, using the same type of calculations used by USDA’s Risk Management Agency for establishing revenue guarantees for crop insurance.

Their contention is that economic models designed to predict prices are not as good as the use of commodity futures prices, since traders are using information that helps establish prices. However, the more distant the contract the less the liquidity behind it and the less valuable it becomes as a predictor of prices into the future. Subsequently, the Iowa State economists have projected a six year price trend, based on the futures market, plus an implied volatility factor. But they are quick to qualify the accuracy of their projection, “Of course, any projected price level is subject to enormous uncertainty, and this uncertainty expands as one looks further and further into the future.”

Based on graphs that depict the price trend from their formula, they say corn futures will fall to a level just under $5 by December 2017. And soybean prices are expected to fall to about $11 per bushel by the same time frame. They say, “These prices suggest that futures traders expecting continued demand growth will hold prices at what can be considered historically high levels. However, the projected prices are substantially below current levels, indicating that traders expect world supply to expand to eliminate the current scarcity of corn and soybeans.”

While those would be considered average prices for corn and soybeans five years out from now, there is also the change those might not be achieved, and Hayes and Li offer a “worst case scenario” made up of the bottom 10% of potential prices. Any farmer who is creating a valid marketing plan should be aware of the potential for the worst-case-scenario.

Year

Corn

Soybeans

2013

$4.27

$9.69

2014

$3.85

$8.89

2015

$3.41

$7.85

2016

$3.12

$7.09

2017

$2.89

$6.55

The Iowa State economists say, “These extremely low prices levels are unlikely, but they do give one pause.”

Summary:

Based on futures prices and their implied volatility, which are used for setting crop insurance revenue guarantees, it is also possible to project corn and soybean prices several years out. This will help farmers with cash flow projections.